Billionaire investor Bill Ackman says the Federal Reserve’s failure to combat inflation has put the markets in a dangerous spot.
"Inflation is out of control," Ackman, Founder and Chief Executive Officer of Pershing Square Capital Management, wrote in a Twitter thread. "Inflation expectations are getting out of control. Markets are imploding because investors are not confident that the @FederalReserve will stop inflation."
Following the Fed’s dovish approach, aggressive monetary policy or economic collapse are the options that remain, he said. "There is no prospect for a material reduction in inflation unless the Fed aggressively raises rates, or the stock market crashes, catalyzing an economic collapse and demand destruction.”
Ackman contended that the Fed catalyzed a downward market spiral and spooked buyers. For the market to reverse course from 40-year inflation highs, the government must tame inflation expectations, he said.
Another billionaire investor, Ray Dalio of Bridgewater, said the Fed's inability to decrease inflation may produce an environment of negative real returns. Traditional safe havens like cash and bonds are no longer attractive for investors, according to Dalio. Bridgewater colleague Bob Prince shared the sentiment, forecasting that the U.S. may be headed for stagflation, in which inflation persists despite slowed growth, increased unemployment, and decreased demand.
"It ends when the Fed puts a line in the sand on inflation and says it will do 'whatever it takes,’" Ackman said, “and then demonstrates it is serious by immediately raising rates to neutral and committing to continue to raise rates until the inflation genie is back in the bottle."
Former Fed Chair Ben Bernanke offered rare criticism of the nation’s central bank on May 16 when he agreed with Ackman and Dalio that policymakers acted too slowly to fight inflation. “Forward guidance, I think, overall, on the margin slowed the response of the Fed to the inflation problem last year,” said Bernanke. “In retrospect, yes, it was a mistake.”
Whether current Fed Chair Jerome Powell and Fed governors will act in time to pre-emp, or at least mitigate, a recession remains to be seen.